BIR Ruling

April 26, 1976 Messrs. Sycip, Salazar, Feliciano, Hernandez, and Castillo 3rd Floor, Far East Building Buendia Avenue, Makati, Rizal Attention: Atty . Andres Gatmaitan Gentlemen : This refers to your letters dated March 4, 1976 and April 19, 1976 requesting a ruling on the tax consequence of the proposed merger between Philippine Commercial and Industrial Bank (PCIB) and the Philippine Bank of Commerce (PBC): It is represented that PCIB is a commercial banking corporation organized and existing under and in accordance with the laws of the Philippines, with principal place of business at the G. Antonino Bldg.,T. M. Kalaw St.,Manila; and that PBC is likewise a commercial banking corporation organized and existing under and in accordance with the laws of the Philippines, with principal place of business at 6756 Ayala Avenue, Makati, Rizal. The proposed reorganization plan to be undertaken by PBC and PCIB is substantially as follows: 1. That PBC shall merge with PCIB so that PCIB shall be the continuing and surviving corporation. 2. That prior to effective merger date, PBC shall assign to its shareholders P7,200,000 out of the indebtedness of Continental Bank, and P6,300,000 out of the indebtedness of Continental Finance, or the total sum of P13,500,000 out of the total P25,000,000 indebtedness of Continental Bank and Continental Finance to PBC. This assignment of that portion of the indebtedness of Continental Finance and of Continental Bank to PBC, considered of doubtful collectibility ,is intended to avoid the issuance of PCIB shares of stock for the portion of indebtedness assigned, which was considered by PCIB and PBC practically a worthless asset. 3. That PBC shall convey, assign and transfer to PCIB all of its business, property and assets, as of December 31, 1975, including its goodwill and tradename and other assets acquired from December 31, 1975 until effective merger date. 4. That PCIB shall assume all of the liabilities and obligations of PBC as of December 31, 1975 including other liabilities or obligations which may have been incurred by PBC from December 31, 1975 until the effective date of the merger, and all the obligations and liabilities and undertakings of PBC as of effective merger date. 5. That in consideration of the foregoing conveyance, assignments and transfers, PCIB will issue of as of the effective date of the merger to the stockholders of record of PBC as of the effective date of the merger, the total of P1,700,000 common shares and P2,750,000 convertible preferred shares of PCIB, with an aggregate par value of P44,500,000 and such PBC shareholders will surrender their PBC shares for cancellation. 6. That on the effective date of the merger, the separate corporate existence of PBC shall cease and expire and PCIB will be the surviving bank. 7. That on the effective date of the merger, the total outstanding shares of PCIB stock will thus be 13,767,608 common shares of the par value of P10.00 each and 3,500,000 convertible preferred shares of the par value of P10.00 per share. The authorized capital stock of PCIB as the surviving bank shall be increased to P300,000.000. 8. That after the effective date of the merger, the convertible preferred stock of PCIB received by the PBC shareholders aggregating P27,500,000 will be sold to the Land Bank of the Philippines at par value, or at the price of ten pesos (P10.00) per share. It is further represented that the purposes for which such merger is contemplated area: aisa dc (a) The proposed merger is in compliance with the objectives laid down by the Central Bank of the Philippines in its "Guidelines on Increased Capitalization and Merger or Consolidation of Commercial Banks" which state that "The merger or consolidation (a) between a large bank and a relatively smaller bank or (b) among smaller banks, shall be encouraged." (b) The proposed merger will improve the competitive position of the surviving corporation, PCIB in the commercial banking field. With the addition of the present PCIB branch network of, among others, the PBC branch, PCIB will have the most extensive branch network in the country. Armed with a larger capital base and the most extensive branch network, PCIB will be in a better position to service the increasing financial needs of the growing Philippine economy. The surviving bank, PCIB, is foreseen to be a significant force in the market, drawing heavily on its resources as the largest commercial bank in the country. In reply, I have the honor to inform you that the reorganization under the plan described above is a merger within the contemplation of Section 35(c)(2) and (5)(b) of the Tax Code. Accordingly, the transfer by PBC of all of its business, property and assets, as of December 31, 1975 including its goodwill and tradename and other assets acquired by it from December 31, 1975 until effective merger date and of all PBC liabilities and obligations as of December 31, 1975 including other liabilities or obligations which may have been incurred by PBC from December 31, 1975 until the effective date of the merger, and all the obligations and liabilities and undertakings of PBC as of effective merger date in exchange for shares of stock of PCIB shall not give rise to the recognition of gain or loss, pursuant to Section 35(c)(2) of the Tax Code. No gain or loss shall be recognized both on the part of the PBC and PCIB on one hand and on the part of PBC stockholders on the other hand upon the exchange of their PBC stocks solely for PCIB stocks pursuant to Section 35(c)(2) of the Tax Code. It should be understood, however, that upon the subsequent sale or exchange of the assets or shares of stock acquired by the parties to the merger, they shall be subject to income tax on the gains derived from such sale or exchange. Accordingly, if the PBC stockholders will, as represented, sell their PCIB convertible preferred stocks to the Land Bank of the Philippines at par value of P10.00 per share, they shall be subject to income tax on the gain, if any, or in the difference between the selling price of P10.00 per PCIB convertible preferred share and the cost basis of each PCIB convertible preferred share to the PBC stockholders. The cost basis of the PCIB shares to be received by PBC stockholders shall be the same as the basis of the PBC stocks they exchanged therefor minus the P13,500,000.00 accounts receivables assigned to the PBC stockholders; and the basis to PCIB of the assets of PBC which the former will acquire in exchange for its own shares shall be the same as the basis to PBC of the same assets as of the time of the transfer. (see Sec. 35(c)(4), NIRC) Once paid and collected, the said accounts receivables shall be included in the gross income of the PBC stockholders at their cash value. In this connection, you are further advised that if the total liabilities to be assumed by PCIB exceed the original or acquisition cost (cost basis) of the property transferred by PBC, the excess shall be recognized as gain of PBC. In that case, the cost basis of the property which will be received by PCIB in exchange for its shares of stock shall be the original cost of the property plus gain recognized to PBC in accordance with Section 35(4)(a) and (b) of the Tax Code; while the cost basis of the shares of stock exchange for said property shall be zero. The foregoing transactions involving the issuance and exchange of shares of stock are not subject to the stock transaction tax. (Sec. 195-B, Tax Code, as amended) The abovementioned transactions shall not be subject to the gift tax as there is no intention to donate on the part of any of the parties. However, in order that the above described reorganization can be considered a merger under Section 35(c)(2) of the Tax Code, the parties to the merger should comply with the following requirements: A. The plan of reorganization should be adopted by each of the corporations, parties thereto, the adoption being shown by the acts of its duly constituted responsible officers and appearing upon the official records of the corporation. Each corporation, a party to a reorganization, shall file, as part of its return for the taxable year within which the reorganization occurred, a complete statement of all facts pertinent to the non-recognition of gain or loss in connection with the reorganization, including: casia (1) A copy of the plan of reorganization, together with a statement, executed under the penalties of perjury, showing in full the purposes thereof and in detail all transaction incident to, or pursuant to the plan. (2) A complete statement of the cost or other basis of all property, including, all stock or securities, transferred incident to the plan. (3) A statement of the amount of stock or securities and other property or money received from the exchange, including a statement of all distributions or other disposition made thereof. The amount of each kind of stock or securities and other property received shall be stated on the basis of the fair market value thereof at the date of the exchange. (4) A statement of the amount and nature of any liabilities assumed upon the exchange, and the amount and nature of any liabilities to which any of the property acquired in the exchange is subject. B. Every taxpayer, other than a corporation a party to the reorganization, who received stock or securities and other property or money upon a tax-free exchange in connection with a corporate reorganization shall incorporate in his income tax return for the taxable year in which the exchange takes place a complete statement of all facts pertinent to the non-recognition of gain or loss upon such exchange including: (1) A statement of the cost or other basis of the stock or securities transferred in the exchange; and (2) A statement in full of the amount of stock or securities and other property or money received from the exchange, including any liabilities assumed upon the exchange, and any liabilities to which property received is subject. The amount of each kind of stock or securities and other property (other than liabilities assumed upon the exchange) received shall be set forth upon the basis of the fair market value thereof at the date of the exchange. C. Permanent records in substantial form shall be kept by every taxpayer who participate in a tax-free exchange in connection with a corporate reorganization showing the cost or other basis of the transferred property or money received (including any liabilities assumed on the exchange, or any liabilities to which any of the properties received were subject),in order to facilitate the determination of gain or loss from a subsequent disposition of such stock or securities and other property received from the exchange. (par. 9803-B, P-H 1963 ed.,p. 9611) In addition to the foregoing requirements, permanent records in substantial form must be kept by the corporations participating in the merger showing the information listed above in order to facilitate the determination of gain or loss from a subsequent disposition of the stock received as a consequence of the merger. acd Very truly yours, EFREN I. PLANA Acting Commissioner of Internal Revenue TAN-1456-040-3 "TAXPAYERS SHOULD INDICATE THEIR TAN IN ALL COMMUNICATIONS TO THE BIR."